Introduction

Many business owners decide to operate their new enterprises through a limited company, as opposed to being an unincorporated business (i.e. a sole trader or partnership). In addition, over recent years large numbers of business owners have transferred their existing unincorporated businesses to companies, in many cases to take advantage of potentially lower tax rates. This '1 Minute Guide' therefore deals with corporation tax, and outlines 10 key points by way of a very brief introduction to the subject. As always, this guide is for general guidance only, and specific professional advice should be sought where appropriate based on particular circumstances.

10 Key Points

1. Who pays corporation tax?
   Corporation tax is payable by UK resident companies, and by non-resident companies carrying on a trade in the UK through a permanent establishment. In addition, unincorporated bodies that are not partnerships (e.g. members' clubs, societies and voluntary associations) fall within the scope of corporation tax.
   (ICTA 1988, ss 6, 11-11AA)
2. What makes a company UK resident?
   A company is normally considered to be resident in the UK if it is incorporated in the UK. A company that is incorporated abroad is treated as UK resident if it is managed and controlled from the UK. However, a company which is regarded as non-UK resident under the terms of a double tax treaty with another country is treated as being non-UK resident for tax purposes.
   (FA 1988, s 66, Sch 7; FA 1994, ss 249-250)
3. What is corporation tax charged on?
   Corporation tax is charged on the worldwide profits of a UK resident company. Non-resident companies with a permanent establishment in the UK from which it carries on a trade are charged on income from that permanent establishment, and on capital gains from the disposal of assets in the UK used for purposes of the trade or permanent establishment. If the same profits are taxable in the UK and in an overseas jurisdiction, double tax relief is generally available to prevent the same profits from being taxed twice.
   (ICTA 1988, s 8)
4. How is corporation tax charged?
   A company's taxable income is charged by reference to income or gains arising in its accounting period. An 'accounting period' first begins when a company falls within the scope of corporation tax (e.g. on the commencement of trading). An accounting period can end on the date of a certain event (e.g. starting or ceasing to trade, going into liquidation or being wound up). However, an accounting period cannot exceed 12 months in length, and normally coincides with the date on which the company's accounts are drawn up (i.e. its 'period of account').
   (ICTA 1988, s 12)
5. How is corporation tax calculated, and what are the tax rates?
   Corporation tax is calculated at the rate applicable to a financial year. A 'financial year' starts on 1 April and ends on the following 31 March. For example, financial year 2004 commences on 1 April 2004. If a company's accounting period does not coincide with the financial year, its profits must be apportioned between the financial years, and the tax rates for each financial year applied to those profits. The corporation tax liability is the total tax for both financial years. The rates of corporation tax for financial years are available via the tax rates section of the Inland Revenue website.
   (ICTA 1988, ss 8, 13-13A)
6. What is the 'non-corporate distribution rate'?
   The non-corporate distribution (NCD) rate (or 'dividends tax' rate, as it is sometimes called) was introduced from 1 April 2004. A minimum rate of corporation tax (19% for financial year 2004) broadly applies to company profits distributed to non-company shareholders (i.e. individuals or trustees) if the company's underlying rate of tax on profits is less than this NCD rate. Companies already paying tax at 19% or above are unaffected. The rules are potentially complex, and include provisions dealing with excess NCDs (i.e. NCDs in excess of profits chargeable to corporation tax) and groups of companies.
   (ICTA 1988, s 13AB, Sch A2)
7. When is corporation tax payable?
   Except for large companies, corporation tax liabilities are due and payable not later than 9 months and 1 day after the end of the accounting period. For large companies, there is a requirement to pay corporation tax in instalments, normally in 4 quarterly instalments but possibly fewer for shorter accounting periods. A company is 'large' for these purposes if it is liable to pay corporation tax at the main rate, i.e. if profits (for financial year 2004) are £1.5 million or higher (reduced proportionately if there are associated companies, or for accounting periods of less than 12 months). However, a company is not 'large' if its corporation tax liability does not exceed £10,000 (reduced proportionately for accounting periods of less than 12 months), or if its profits do not exceed £10 million (reduced proportionately if there associated companies) and it was not 'large' in the previous year.
   (TMA 1970, ss 59D-59E, SI 1998/3175)
8. When must corporation tax returns be filed?
   The corporation tax self assessment return (form CT600), plus any relevant supplementary pages and full accounts and computations must normally be filed within 12 months after the end of the period for which the return was made, or, if later:
   • if the company's accounts cover a period of between 12 and 18 months - 12 months after the end of that period of account;
   • if the company's accounts cover a period longer than 18 months - 30 months from the start of that period;
   • 3 months from the date of a notice by the Inland Revenue requiring the return.
   Companies filing returns late are liable to an automatic penalty. The amount of the penalty can broadly depend on the lateness of the return, and whether previous returns were also filed late.
   (FA 1998, Sch 18 paras 14-20)
9. Notifying the Inland Revenue
   A company must notify the Inland Revenue when it comes within the charge to corporation tax, whether for the first time or after a dormant period. The notice must be given no later than 3 months following the start of its first accounting period, or 3 months after the start of an accounting period that does not immediately follow the previous one. Penalties may be imposed for failing to comply, unless the company satisfies the Revenue that it had a reasonable excuse, and the notification requirement is satisfied without unreasonable delay after the reasonable excuse has ended. There is a separate requirement to notify the Revenue within 12 months from the end of its accounting period that it is chargeable to tax, with separate penalties for failing to comply. However, in practice companies will generally satisfy both notification requirements through a single notice.
   (FA 2004, s 55; FA 1998, Sch 18 paras 2-7)
10. Associated companies
    The corporation tax lower and upper profit limits are scaled down proportionately according to the number of associated companies during the accounting period. This includes companies associated for only part of the period, but excludes companies which were dormant throughout the period. Companies are broadly associated if, at any time during the accounting period, one company has control of another, or both companies are under common control by the same person or persons.
    (TA 1988, s 13)

Disclaimer

The content of these guides is based on tax legislation in operation at the time of publication, which may subsequently have changed. Whilst every care has been taken in its production, no responsibility can be accepted for any action undertaken or refrained from as a consequence of this material. This information is for general guidance only. Specific professional advice should always be obtained based on personal circumstances. TaxationWeb Limited accepts no responsibility whatsoever for any action undertaken or refrained from as a result of the information contained herein.

Article Added Wednesday, 01 December 2004 | 8685 Hits

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